Jamie Dimon says rules for
systemically important global banks that would increase JPMorgan
Chase & Co. (JPM)’s capital requirements by about one-third will hurt
profits, investment returns and the U.S. lender’s future growth.

Shareholders may see things differently if Stockholm-based
Nordea Bank AB (NDA), Sweden’s largest, is any guide.

The four biggest banks in the Nordic region’s dominant
economy hold more capital on average than those in the U.S.,
with common equity equaling 12 percent of their assets as
calculated under new regulations, according to data compiled by
Bloomberg. That compares with 6.5 percent for the four biggest
U.S. banks as estimated by analysts at Nomura Securities
International Inc. The Swedish banks also have higher price-to-
book values and better investment returns than most U.S. banks.

“Dimon and other U.S. banks would be wise to follow the
example of the Swedish banks” before regulators impose higher
capital rules, Gunther Marder, chief executive officer of the
Swedish Shareholders’ Association, which represents about 70,000
investors, said in a phone interview. “Many investors in Sweden
appreciate the transparency and higher capital levels of the
banks and know that having a lower risk profile will likely lead
to a better return over the long term.”

Swedish Premium

Investors are willing to pay a premium for the more
conservatively run Swedish lenders. Nordea, with common equity,
or core Tier 1 capital, of 9.7 percent of its risk-weighted
assets as calculated under rules agreed to by the Basel
Committee on Banking Supervision, has a price-to-book ratio of
1.18. Dimon’s bank, the second-largest U.S. lender, which says
its core Tier 1 capital under the new Basel rules is 7.6
percent, is trading at 0.9 times book value, meaning investors
believe the lender isn’t worth as much as its stated assets.

Nordea’s five-year average return on equity through 2010 is
16 percent compared with 9.3 percent at JPMorgan. The New York-
based bank, which has more than twice the assets of Nordea, is
considered by analysts one of the strongest and best capitalized
U.S. lenders. Howard Opinsky, a spokesman for JPMorgan, declined
to comment.

Nordea, Svenska Handelsbanken AB (SHBA), Swedbank AB (SWEDA) and SEB AB,
Sweden’s four biggest banks, whose assets are about four times
the size of the country’s economy, are trading at an average of
1.25 times book value. Bank of America, based in Charlotte,
North Carolina, the largest U.S. bank with $2.3 trillion in
total assets and 5.5 percent core Tier 1 capital, according to
Nomura estimates, has a price-to-book ratio of 0.48. The average
ratio among the top four U.S. banks, which also include
Citigroup Inc. (C) and San Francisco-based Wells Fargo & Co. (WFC), is
0.81, data compiled by Bloomberg show.

‘Well-Capitalized’

“The main reason Swedish banks have a valuation premium is
because they are well-capitalized, transparent and the country’s
economy is strong with interest rates going up,” said Andreas Hakansson, an analyst at Exane BNP Paribas in Stockholm.

Loans in Sweden are increasing, the unemployment rate is
7.9 percent and the economy expanded at 6.5 percent over the 12
months ended March 31 compared with 2.3 percent in the U.S.

Dimon, 55, has said that JPMorgan won’t be able to make
“an adequate return” on certain products under rules proposed
by the Basel committee that would require about 30 systemically
important financial institutions to hold core Tier 1 capital of
as much as 9.5 percent of total risk-weighted assets, 2.5
percent more than other banks.

The JPMorgan CEO told analysts yesterday, after the bank
reported its highest half-year profit ever of almost $11
billion, that the company will shed some assets that require
higher capital reserves under the new rules.

Dimon’s ‘Great Fear’

Speaking at a bank conference in Atlanta last month, the
JPMorgan CEO asked Federal Reserve Chairman Ben S. Bernanke
whether capital requirements and bank rules have gone too far
reining in the banking system and are slowing economic growth.
The U.S. unemployment rate rose to 9.2 percent in June, and the
S&P/Case-Shiller index of property values in 20 cities showed
that home prices slumped in March to their lowest since 2003.

“I have a great fear someone’s going to try to write a
book in 20 years, and the book is going to talk about all the
things that we did in the middle of the crisis to actually slow
down recovery,” Dimon said.

Bernanke, 57, responded that Dimon’s points are valid and
that the Fed lacks the tools to study the net impact of
regulatory and market changes over the past three years.

‘Reasonable Level’

Those concerns aren’t shared by Bjorn Wahlroos, chairman of
Nordea’s board, who holds a comparable position at Finnish
insurer Sampo Oyj (SAMAS), Nordea’s largest shareholder. A core capital
ratio of 10 percent is a “reasonable level,” he said.

“After the exercise with the financial crisis, there’s one
big thing to be learned: The system needs more capital and more
transparency,” Wahlroos, 58, said in an interview in his office
in Helsinki. “We all need to move in that direction.”

Regulators in Sweden are pushing for its banks to hold more
core capital than global rivals. The country’s financial
watchdog wants the four main banks to have a core Tier 1 capital
ratio of between at least 10 percent and 12 percent. Stefan Ingves, the central bank governor, has said Sweden should
consider tougher rules than those set by the Basel committee and
push the changes through faster than the 2019 deadline.

Swedish banks have invested in what many say are less risky
assets. U.S. banks applied an average risk-weighting of 69
percent to their assets compared with 41 percent for Europe,
Citigroup analysts led by Kinner Lakhani said in a June 20
report. The average risk-weighting among Swedish banks was less
than 20 percent, according to a Nomura report last month. The
only developed country with higher average risk-weightings than
the U.S. is Russia, where the figure is more than 95 percent,
Nomura said.

Different Standards

The high number for the U.S. could mean that bank balance
sheets are riskier or that lenders are doing a better job
assessing risk, said Brian Foran, a Nomura analyst in New York.

Residential mortgages held by banks have a risk-weighting
of 50 percent in the U.S., according to the Federal Deposit
Insurance Corp. That means lenders will have to hold at least
3.5 cents of capital against every $1 in whole loans. At
Stockholm-based Swedbank, Sweden’s largest mortgage lender, the
average risk-weighting on home loans was 8 percent in the first
quarter, while Handelsbanken had an average risk-weighting of
5.2 percent, according to company filings.

“One of the questions you often get from investors in
Europe is: Are the Nordic banks really the best-capitalized
banks in the world, or do they just have risk-weightings on
their assets that are too low?” Foran said.

U.S. banks are currently held to Basel I capital standards
because the country opted out of Basel II rules adopted by other
countries in 2004. That means U.S. lenders use a standardized
system for calculating capital needs in which asset types are
assigned specific weightings, ranging from zero for lending to
the U.S. government to 100 for derivative products.

‘Data Cleansing’

European banks have more flexibility to determine risk-
weightings. HSBC Holdings Plc (HSBA), Europe’s biggest bank, was able
to lower its capital requirements by reassessing the treatment
of outstanding derivatives contracts. Under international
accounting rules, banks have to hold extra capital against such
contracts that aren’t fully hedged, and they can’t hedge their
contracts without good data.

The London-based bank was able to make “significant risk-
weight asset savings” through “data cleansing,” Iain Mackay,
HSBC’s finance director, said at an investor meeting last month.

“It’s not transparent to anybody outside whether the model
is as good as it could be and, therefore, the capital weighting
is right,” Chairman Douglas Flint said at the May 11 meeting.

‘Standard and Fair’

That’s a statement Dimon would agree with.

“What’s not transparent is the calculation of risk-
weighted assets” under international accounting rules, Dimon
said at a March 30 event in Washington. “Equivalent banks
overseas -- adjusting for differences in accounting -- it comes
to like half of our risk-weighted assets. The regulators have
said they’re going to try to make sure it’s standard and fair,
and I’ll take their word on that, but it’s just one more thing
we have to keep an eye on.”

Swedish banks have made an effort to be transparent about
how they judge and calculate risk-weighted assets, said
Hakansson of Exane BNP Paribas.

“This is exactly the type of detailed information the
market needs to have a view on how capital ratios are
calculated, and you really don’t get this level of detail with
most European banks,” Hakansson said.

Increased Transparency

Sweden has pushed for increased transparency for years.
Ingves, named chairman of the Basel committee last month,
oversaw the Swedish central bank’s move to issue forecasts of
what level it expects the benchmark interest rate to be over a
three-year period.

“An individual depositor or investor just cannot judge
what’s going on inside a bank on his or her own,” Ingves said
in an interview in Stockholm. “By having transparent systems in
place you have many, many people looking at what’s going on and
that makes the system safer for everybody.”

The drive for transparency and stricter capital rules is a
legacy of past Swedish banking crises. In the early 1990s, the
collapse of an overheated property market triggered bank losses
that led to a government rescue. Nordbanken and Gota Bank were
nationalized and merged in 1993 to create Nordea in a state-
engineered restructuring.

Lehman ‘Eye-Opener’

A property-market crash in the Baltic region following the
bankruptcy of Lehman Brothers Holdings Inc. in September 2008
and a global credit squeeze led to further losses. Swedbank, the
biggest lender in the Baltics, was hit hardest and posted losses
in all quarters of 2009. It relied on government guarantees for
funding until July 2009 and raised 27.5 billion kronor ($4.17
billion) in two rights offerings to replenish capital.

“The fall of Lehman was an eye-opener for everybody,”
Swedbank CEO Michael Wolf said in an interview. “We’re much
more conscious of how important being properly capitalized is,
and I’m sure our shareholders appreciate this.”

That may explain why Swedish lenders have largely escaped
the sovereign-debt crisis that has plagued so many European
rivals. Nordea said it holds no Portuguese, Italian, Irish,
Greek or Spanish sovereign debt.

“We are very down-to-earth, and we like to know where the
money is,” said Wahlroos, the Nordea chairman. “Nobody is
going to sell on projected cash flow and its volatility or
whatever the parameters are used to describe a structured-
finance product.”

Insuring Debt

Confidence in Swedish banks means it’s cheaper to insure
debt than for U.S. financial companies.

The cost of protecting Handelsbanken debt is the second-
lowest in the world among 196 banks tracked by Bloomberg at 68.1
basis points, compared with 89.4 for JPMorgan. The average for
U.S. banks is 131.3. A basis point is one-hundredth of a
percent, and each additional point means an extra $1,000 a year
to protect $10 million of debt for five years. The comparable
figure for Nordea debt is 96.2, higher than for JPMorgan.

While Nordea has a higher price-to-book ratio than
JPMorgan, its shares have slumped 12 percent this year,
exceeding JPMorgan’s 4.9 percent decline. The government has
been selling shares in Nordea as part of a plan to divest its
entire stake in the bank and generate cash to pay down state
debt. Sweden owns about 13.4 percent of Nordea, a holding valued
at about 36 billion kronor. It sold 6.3 percent in February.

Handelsbanken’s shares have fallen 13 percent this year and
SEB’s 17 percent, while Swedbank is up 7.3 percent. The 24-
member KBW Bank Index is down 11 percent.

“Because the macro environment is better in Sweden, I
would say that the essential fitness of the individual banks is
also better,” Luis Maglanoc, the global head of credit research
at UniCredit SpA in Munich said. “The challenges of the
financial crisis are practically over for Sweden.”